Advantages of price skimming include: ability to recover costs quickly, creation of a premium brand image, and targeting of price-insensitive customers. Disadvantages include: potential to alienate customers due to high prices, risk of attracting competition, and it may not be sustainable in the long term.

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Price skimming can maximize the profit margin for a product by initially setting a high price for a new or innovative product to 'skim' off the maximum willingness to pay by customers. This strategy targets those customers who are not price sensitive and are willing to pay a premium for the novelty or unique features of the product. As the product becomes more common or competitors enter the market, the price is gradually reduced. This allows the company to maximize its profits at each stage of the product's lifecycle.

In price skimming, a product's price, gross margin, units sold, and projected revenue are tracked across four phases.

1. Introduction Phase: The product is introduced at a high price to recover development costs and target early adopters who are willing to pay a premium. Gross margin and projected revenue are high, but units sold are low due to the high price.

2. Growth Phase: As the product gains popularity, the price is gradually reduced to attract a larger customer base. Units sold increase, leading to an increase in projected revenue, while the gross margin begins to decrease.

3. Maturity Phase: The product reaches its peak popularity and the price is further reduced to compete with other products. Units sold are at their highest, but the gross margin and projected revenue begin to decline.

4. Decline Phase: The product becomes obsolete and the price is significantly reduced to clear inventory. Units sold, gross margin, and projected revenue all decrease.

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Pricing Strategies (Part 2)

Need to improve your product pricing to maximize your profit margin? This Pricing Strategies Toolbox...

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